Posted by: Josh Lehner | July 1, 2020

Bar and Restaurant Demand (Graph of the Week)

Oregon’s economy has reopened. Pent-up demand turns the economy from recession into recovery. But a key question is just how strong is that pent-up demand? Does cabin fever and increased household savings outweigh the fears and uncertainties about the virus? In this edition of the Graph of the Week we see some competing data points here in Oregon.

First, video lottery sales are booming. Currently they are running about 90% of the sales levels seen a year ago, and considerably stronger than expected. Players have returned to their favorite bars and restaurants. However, the number of seated diners at Oregon restaurants who use OpenTable is running around 40% of year ago numbers. The number of people sitting down to eat remains considerably lower. Without trying to both-sides the data, this gap is fascinating. The differences will be important to watch in the weeks ahead as for what it means in terms of the virus, consumer behavior, and the economy.

In terms of bars and restaurants, the latest data on U.S. consumer spending showed that Americans spent 33% less on going out to eat in May 2020 compared to May 2019. Here in Oregon employment at bars and restaurants is down 45% over the same time period. There are some differences seen depending upon the type of establishment with limited-service restaurant employment down 31% and full-service restaurant employment down 59%. Some of differences in the chart above are likely tied to the types of establishment as well.

It’s important to keep in mind that even as consumer demand returns for our favorite bars and restaurants, it’s not easy for these businesses. Leisure and hospitality is among the most at-risk sectors due to the economic hit and the number of small businesses.

In terms of video lottery and gaming more broadly, I will follow up here in a few weeks when June financials are released around the country. Most everywhere was shut down in April and May, so June revenues will be an indication of pent-up demand for gaming elsewhere. In the meantime I think it may be worth quoting what we wrote in our forecast last month with a couple updates in brackets [ ].

As always, there are considerable risks to the outlook. On the upside, the level of pent-up demand for gaming may return sales to a higher level, faster than assumed. The state has seen a noticeable increase in scratch ticket sales in recent weeks [during the shutdown], as players seek out available gaming opportunities and entertainment. Additionally, even though most professional sports were put on hiatus, some players continued to wager on table tennis. When combined with the initial video lottery sales in Phase 1 reopening counties, this indicates that pent-up demand for gaming and entertainment more broadly is real. [Clearly we have seen this.]

However, downside risks certainty remain. This initial pent-up demand may reflect the one-time household recovery rebates or the extra $600 per week in expanded unemployment insurance payments. [Oregon kicker refunds as well] These are temporary and any impact will fade in the weeks ahead. But the real downside risks pertain to hesitant consumers only going out to their favorite bars and restaurants more gradually than assumed, or pull back further on discretionary spending like they did in the aftermath of the Great Recession.

At this point, the key question for the outlook is how will households behave going forward. Will these trends continue? Are households continuing to dip their toes in the water more and go out to eat little bit? Or given the potential fiscal cliff issues regarding federal assistance, and the growing number of cases, will household demand level off or retrench? These are the issues our office are monitoring and discussing with our advisors.

Here’s to everyone having a fun and healthy holiday weekend. Be kind. Wear a mask. That way all of us and the economy can learn to grow around the virus, and not shut down again.

Posted by: Josh Lehner | June 30, 2020

COVID-19 and Migration

In terms of the economy, the biggest risk is the amount of permanent damage that accumulates during the social distancing phase. Across the country this is largely about business closures and/or permanent layoffs. In terms of a more Oregon-specific risk, one item our office is watching closely is migration. While growth for growth’s sake is not necessarily a good policy goal, the real benefits of migration for Oregon isn’t just the increase in demand for local pizza shops, but rather the ample supply of mostly young, skilled workers for local businesses to hire and expand. Remember, long-run economic growth is all about the number of workers and how productive each worker is.

While people pack up and move to Oregon in good times and bad, we know most people follow the jobs. Migration flows are considerably larger when job opportunities are plentiful. As such, the recession is expected to change both the annual pattern of migration to Oregon but also the longer-term population forecast. Now, Oregon is still expected to see population growth, however these gains in the next few years are reduced from recent forecasts.

In thinking through the outlook it is helpful to distinguish between the expected impacts at different points along the way.

In the near term, migration is drastically reduced. Hardly anyone is moving during a pandemic and shelter in place style policies are in effect. Provided these policies lift and households are confident enough over the prime summer moving months, the impacts of the shutdown itself may prove minimal. The risk here is that the public health situation deteriorates such that nobody moves this summer, which is not our baseline forecast.

Over the medium term, migration will be reduced due to the recession. Fewer people will move here as job opportunities are harder to come by. Household formation will also be weaker due to income losses and uncertainty. Overall, our forecast for population growth over the next five years is lowered by 36,000 (-0.8%). What this effectively means, at least relative to our previous forecast, is that Oregon will basically lose one year of migration over the next five. Taking into consideration the typical age of migrants and labor force participation rates, this forecast change reduces the potential size of Oregon’s labor force by about 15,000 a few years down the road. In a stronger economy and given demographics, that’s roughly equivalent to 7 or 8 months of job growth. This is no minor change.

Now, over the long term our office does not expect any appreciable differences in the state’s ability to attract and retain working-age households. The combination of available jobs, scenic beauty, and housing affordability that’s bad, but also not the worst along the West Coast are all expected to remain.

Now, the reduced migration from the recession is expected to create persistent damage to the long-run outlook. However once the recession subsides, the damage is not expected to continue to mount or worsen. Migration flows in the second half of the decade are actually raised a few thousand relative to previous forecasts.

This lower population outlook has implications not just for labor force growth and different regions of the state, but also for things like the housing market which we will circle back on in the near future. Additionally, I have been fielding a lot of requests regarding remote workers and how the pandemic may change migration patterns. I am in the process of updating all that information and will share when it’s available.

For more on the population and demographic outlook, see our office’s forecast summary starting on PDF pg 30 here. It touches on fertility rates, age structures, how demographics can impact budgets, and expectations of an additional U.S. House of Representatives seat, among other things.

Posted by: Josh Lehner | June 24, 2020

How Strong is the Economy?

Last week we talked a little bit about the happy surprise of the May 2020 employment report. Jobs are up nationally and here in Oregon, while unemployment is down at the same time. Check out that post for a few more details and some new research trying to get at the temporary vs permanent impacts of the pandemic.

Today, I wanted to follow-up with the classic economist discussion of on the one hand, while on the other hand… Bear with me.

First, keep in mind that following things are all true. The economy remains in the deepest hole on record in Oregon. However the data is turning around in May and June. The technical recession is likely over, even as the economic pain will take some time to heal. And the economy, while still in bad shape, is doing noticeably better than expected, and our office’s forecast we released last month.

The hard thing to parse right now is whether that better-than-expected data truly represents a fundamentally better, or more resilient economy, or whether it represents a sort of false dawn. And then how do each of those possibilities change, or not, our thinking about the future.

For instance, we know that the big, and relatively quick federal response has an economic impact and helped put a floor under the initial fallout. The CARES Act provided a lot of much needed support for households, workers, and firms. We know household incomes are actually up in April due to the recovery rebates and expanded unemployment insurance benefits. Retail sales bounced off the bottom in May. This Friday we get personal income and total consumer spending data for May, which are likely to show healthy readings as well. In the chart below you can see our office’s forecast for Oregon personal income and how these federal assistance payments factor in.

Three things to note here. First, in terms of the impact on the state revenue forecast, what matters is that difference between our previous outlook and our current one. The outlook is lower due to the recession. Plus you need more nuance in the types of income here to get at the taxable part, but I digress.

Second, from an economic and household perspective, notice how incomes aren’t declining. Total income in the state is expected to be essentially flat this year and next. This, too, puts a floor under the impact on business sales, given households — at least in aggregate — are expected to have steady incomes. The increases in income in April and likely May are part of these annual figures above. As you can see in the next chart, these federal payments are considerably larger than anything seen in recent cycles. The CARES Act really does help bridge the short-term gap in recent months.

However the third thing is that these federal assistance programs are temporary. The recovery rebates were a one-time deal. The expanded unemployment insurance benefits expire in a month. And the Paycheck Protection Program loans/grants to small businesses are running out as I write.

That is the key question. Will more aid to households and firms be coming? Or will they go away as scheduled? Outside of getting clarity on the virus itself, this will likely determine whether the better-than-expected data does represent a fundamentally stronger economy, or a false dawn.

On the business side of things, economists are increasingly concerned about closures and permanent damage to the economy. This has been the primary focus of our presentations and discussions lately and I wanted to share a bit of that.

The point is running a business is hard. Even in good economic times about 1 in 10 Oregon companies close every year. And we are not currently in good economic times. The trouble is at least threefold. First, seeing record high unemployment is one thing, but it will be substantially worse if there are no firms leftover on the other side of the pandemic to hire workers back. Second, the economy has already been struggling with low rates of entrepreneurship and business formation. It will take years to regain the number of lost businesses. Third, firms build these incredibly complex webs, or networks when it comes to supply chains, professional services, training workers, in addition to intellectual products and the like. Losing a firm breaks all those relationships, compounding the problems and rebuilding the networks takes additional time as well.

One additional issue to watch today is the impact on small businesses. They do not have access to the same financial or capital markets as big companies. They do not issue stock or bonds and generally rely on current revenues and whatever wealth the owner has, often times his or her home equity. Given the typical small business has 1, maybe 2 months of liquid reserves, and the PPP loans/grants were designed to last 8 weeks, it means a sizable increase in firm failures is likely unless the economy proves much stronger than expected, or more assistance is provided in the weeks and months ahead. As Fed Chairman Powell has said, we’re really trying to avoid a liquidity problem turning into a solvency problem.

This final chart is designed to try and help scope some of these risks by sector here in Oregon. On the vertical axis you see a measure getting at a drop in consumer demand, based on our office’s employment forecasts for each industry. On the horizontal axis you see the share of jobs in that sector at small businesses. The thinking goes that the industries that see a larger, or more permanent drop in demand are more likely to result in firm closures, as are the sectors with more small businesses given they are more at risk than big businesses. Every individual firm is different, and their outlooks vary considerably, but this high level scatter plot does highlight some risks.

The final thing I will add is during our forecast presentation there was an important question about what state policy can do to help. A similar question is asked in pretty much every presentation I have given lately as well. And the answer is that this is really hard. Especially for state and local governments which have balanced budget requirements, unlike the federal government. Public revenues will never be enough to fill the need in the entire economy. So what do you do with limited resources?

Today we know that bars, restaurants, barbershops, nail salons and the like have been the most impacted by the pandemic and social distancing. They needed help months ago and still do. Even with the economy reopening, restaurant industry data suggest that while consumer demand has rebounded, it has started to flatten out, likely due to fears and uncertainty over the virus.

However, should the economy remain in bad shape for an extended period of time, there remains the looming specter that larger, regional anchor employers may be at risk. Keep in mind that these firms can really be anything from a company headquarters, to a hospital, to a university, to a distribution center, or a mill. Every local and regional economy is different, but they do have one or more anchor employers. And if those close, then it doesn’t really matter how much assistance you provide to the pizza parlor, because it will continue to struggle given the loss of jobs and income in the broader economy.

Balancing the needs of the firms struggling the most today, versus some unknown future risk, given limited resources is a really, really difficult thing to do. I don’t have an answer, but this is a key consideration I know policymakers are trying to deal with today and in the months ahead.

Bottom Line: The economic data indicates a severe recession, but growth has returned. The economy is doing noticeably better than expected. That said it remains to be seen whether there is another shoe yet to drop, particularly should federal assistance to households, workers, and firms expire as scheduled this summer. Until there is clarity on the public health side of things, the primary risk to the outlook remains the amount of permanent economic damage that accumulates during the social distancing phase of the cycle. Downside risks remain, even as we hope the stronger economic readings continue and the economy learns to grow around the virus.

Posted by: Josh Lehner | June 19, 2020

May 2020 Employment: A Happy Surprise

This week we got the May 2020 employment report for Oregon. Like the U.S., it was a happy surprise in that jobs grew and unemployment declined. Today I just wanted to highlight the data, update our charts, and introduce a new piece of research. Next week I will follow-up with more thoughts on how our office is working through the report’s implications and what it means.

First, the good news is that in May, Oregon added back about 1 out of every 12 jobs lost during earlier in the recession. The state remains in the deepest, or most severe recession on record, with employment data back to 1939. However those losses are no longer mounting based on the latest data. This truly is good economic news!

Now, this rebound in employment was a bit of a surprise and I’m of many minds right now trying to parse out what it means. On one hand this shouldn’t really be a surprise. High frequency economic data all point toward early May as being the worst of the recession, with things getting better since. At some point, economic growth does translate into net employment gains. The standard monthly data are all starting to bear this out with jobs up, unemployment down, industrial production and consumer spending rising, and the like.

Now, on the other hand, what was surprising was the good jobs report with the backdrop of initial claims for unemployment insurance continuing to come in higher than anything seen in past recessions. This is true even in the most recent few weeks.

The question is what happened? How much of this potential disconnect is about workers seeing hours reduced enough to claim UI but not being fully laid off? How much is due to the fiscal impact of the CARES Act? Are we waiting for another shoe to drop as the permanent damage mounts even as topline data improves? Or is the economy truly better, and proved much more resilient than expected? Were forecasters simply too pessimistic? I’ll have more thoughts on some of this next week regarding business and sector risks, and potential permanent damage.

But before then I wanted to introduce some new research I find very helpful to think through some of the current labor market data.

Indeed’s chief economist Jed Kolko pioneered a measure on Twitter the other week and recently wrote up his findings in The New York Times. The idea behind Jed’s work is to gauge the difference between permanent and temporary damage in the economy. We know most of the layoffs in recent months are/were expected to be temporary. In Oregon, when firms notify the state of layoffs, 86% of those layoffs are expected to be temporary. And if you look at the Oregon household survey data, about 75% of currently unemployed Oregonians are classified as on temporary layoff (the others are permanently laid off, or entrants into the labor market, or those who quit their jobs, etc).

As these workers are recalled to their jobs, we will see improvements in the topline data, which is great news overall. But it may also mask some darker, or more permanent changes seen in the economy. Jed’s calling his new measure the core unemployment rate and the calculation does two things. First it excludes all those unemployed on temporary layoff. Second he adds back in the marginally attached workers, or those who are not currently looking for a job but have looked for one in the past year.

The first part gets to the permanent layoff component and also those who are looking but can’t find work as firms aren’t hiring. The second part gets at any short-term participation rate issues where people stopped looking for work during the pandemic but otherwise may want a job. Keep in mind that discouraged workers are a subset of marginally attached workers, which is a bit broader by definition.

The chart above is an Oregon version of Jed’s core unemployment measure. Three things to note. First, a huge thank you to Tracy Morrissette over at the Employment Department for his great work digging into the details of the data that allowed me to recreate this. Second, the vast majority of the increase in the unemployment rate is expected to be temporary. Third, even so, the amount of permanent damage has increased, albeit relatively modestly so far. The core unemployment rate in Oregon has increased by just more than 1 percentage point, while the headline unemployment rate has increased by about 11 percentage points.

The key issue to watch moving forward will be how much or how little of the expected temporary economic pain turns permanent. Even under optimistic assumptions, it will take time to get back to full employment. There will be increases in firm closures and the number of long-term unemployed as a result of the recession. However, should the amount of permanent damage that accumulates be relatively small, then the recovery will be stronger and the economy will return to full health sooner. We will continue to monitor these changes in the months ahead.

Stay tuned next week for a few more thoughts on the data, the risks for businesses and sectors, and comparisons with our forecast.

Note: Economist Jason Furman has a somewhat similar concept, a measure he calls the full recall unemployment rate. It’s a bit more complicated of a calculation and is really designed to adjust for both the temporary layoffs, but also any real labor force participation rate issues. Here in Oregon our labor force participation rate is holding up. There is no indication in the data that workers are dropping out in vast numbers during the pandemic. But should that change, Jason’s work will be important to continue to track for Oregon.

Posted by: Josh Lehner | June 10, 2020

COVID-19: The Revenue Forecast in Context

Mark wanted to provide some additional insights into the revenue outlook. His thoughts are below.

The Revenue Forecast and Oregon’s Budget Gap

On December 12, 1980, Governor Vic Atiyeh issued Executive Order # EO-80-21, which created the Governor’s Council of Economic Advisors. The Council answered a need not only to improve the advice concerning future economic activity of the State of Oregon, but also to improve fiscal planning and revenue forecasting. The Council recently met with state decision makers to talk about the state budget gap and its impact on the economy.

Council members come from a range of academic and industry backgrounds, and hold a range of political ideologies. The Council’s main role is to advise our office on the quarterly economic and revenue forecast. It was with the reluctant blessing of the Council that the largest drop ever was put in the quarterly forecast the other week. Although the revenue outlook is a big piece of Oregon’s budget gap, it is far from the only one. Other key factors entered the discussion as well.

The Revenue Forecast  

The record drop in the June quarterly forecast was a reflection of the unique nature of this downturn. The sudden stop of economic activity made it immediately clear that Oregon was in recession, and that job losses would be severe. In the typical recession, it takes some time before the downturn is fully incorporated into the baseline outlook.

This time around, the damage was incorporated into the forecast all at once. Other than the timing, the change in revenue expectations is not unusual relative to past recessions. Over the 40 years that the Council has advised our forecasts, big recessionary declines have been the norm, with the notable exception of the early 1990’s. The stable forecast during the 1990’s recession was admittedly more a function of luck than foresight. Incomes and tax revenues did not decline in Oregon at that time–growth only slowed.

The chart below shows General Fund forecast errors over the past 40 years. The composition of the General Fund has been very stable over time, making comparisons possible. However, Oregon now relies significantly on other discretionary revenues such lottery sales and the new corporate activity tax, making the overall revenue hit larger than is reflected by General Fund changes alone.

How has the forecast performed? It depends on how you look at it. During the average two-year budget period, General Fund revenues have come in 1.3% higher than was expected when budgets were written. Not bad.

Unfortunately, it is rare that we actually experience something that looks like an average budget period. In practice, large forecast errors happen frequently. In roughly half of all budget periods, there is either a large revenue shortfall or a significant kicker payment issued. Over time, forecast errors on the downside and upside have offset each other, but can be very large in any given budget period. Our office depends heavily on the God of Offsetting Errors. Even in a year when the overall revenue forecast hits the mark, forecasts for some revenue components will be way too high, with others way too low.

If current expectations hold, the revenue decline for the current biennium will be something that policymakers have dealt with before. The June forecast calls for $1.5 billion less in General Fund revenue than was expected when the budget was drafted. The 2001-03 biennium saw a forecast drop of $2.3 billion in a General Fund less than half its current size.

That said, this historical forecast comparison does not fully capture the difficulty facing policymakers today. Timing has helped. The current biennium’s revenue outlook would have been revised downward even more if several months of it were not already in the books. In particular, income tax liability for the 2019 calendar year was already set before the downturn.

Also, the historical forecast comparison does not capture the strain on future budgets. We cannot estimate a budget gap until there is a budget, but know there will be fewer resources going forward. Relative to the last forecast, we now expect $3.5 billion less in General Fund revenue during the 2021-23 budget period, and over $4 billion less in overall discretionary revenues.

Unlike the federal government, Oregon and most other states must run a balanced budget. As a result, more revenue must be found or services must be cut. The Council’s discussion centered on best strategy to bridge the gap.

Falling tax revenues are only one component of the state budget gap. The expenditure side of the ledger and other funds and balances are equally important.

Balances and Reserves   

Before now, Oregon has never had the benefit of entering a downturn with a significant amount of reserve funds or balances. Automatic deposits into the Rainy Day Fund (out of corporate taxes and General Fund ending balances) and Educational Stability Fund (out of lottery sales) have added up over the decade-long economic expansion leaving us with sizable resources. If left untapped by the end of the biennium, the two reserve funds together are expected to reach $1.75 billion or 9% of the General Fund.

In addition to dedicated reserve funds, the Oregon budget also had a large expected ending balance heading into the recession. Due in part to the incomplete way the 2020 short session ended, the budget had more than a $1 billion cushion for the current biennium. Although the June revenue forecast erased this and then some, the budget gap is smaller because of it.

Although reserves are welcome, they alone will not be enough to bridge Oregon’s budget gap over the extended horizon. At request from Governor Brown, the Council discussed how to best deploy these reserves strategically over time balancing the dire need for public services today with the long-term nature of the expected revenue shortfall.

Federal and Other Funds   

Although most of the attention falls on the General Fund and Oregon’s other discretionary revenues, they represent a minority of the state’s resources. Oregon’s agencies collect a wide range of dedicated revenue streams that together account for almost twice the General Fund. Some of these revenue sources are already weakening due to the recession. For a look at the range of Other Fund revenues from fishing licenses, to PERS investment earnings, to gasoline taxes. See out office’s Other Funds Report for more information.

Federal funds are also larger than the General Fund, and are particularly important during recessions. State and local governments deliver the core services that distressed households and businesses require during downturns. With the ability to run deficits, the federal government can support these services when state policymakers cannot.

The CARES Act delivered a significant amount of aid to states, but much of it was restricted from being used to support core state services. Federal policymakers dedicated $1.6 billion to Oregon as part of the CARES Act to be used to support pandemic-related costs. Across the country, state and local governments have pushed for more flexibility in the use of these funds. Despite some success in these efforts, many core services remain unable to benefit.

There is a saying that state governments do only three things: Educate, Medicate and Incarcerate. There is an element of truth to this. Together, Education, Human Services and Public Safety account for 92% of Oregon’s General Fund expenditures. Federal support for core educational and healthcare services in the CARES act is only half as large as what was included in the American Recovery and Reinvestment Act of 2009, despite arguably more need today.

Expenditures   

There are two sides to the state budget–revenues and expenditures. While revenues drop during recessions, the need for a wide range of core public services rises. Caseloads for unemployment insurance, health services, housing support and many other programs will increase going forward. Agencies are currently drafting their budget requests for the upcoming biennium which will reflect the new reality. We will get a first look at how much need has risen when Governor Brown releases her recommended budget in the fall.

Much of the Council’s discussion with policymakers revolved around how to prioritize state programs in the current economic environment. Long-term investments in the economy were also discussed, as was the merit of tapping bond markets to backfill crucial programs in the way businesses secure working capital loans. Additional discussion sessions are in the works to help policymakers with the difficult choices ahead.

 

Posted by: Josh Lehner | June 4, 2020

Economic Disparities, an Ongoing Discussion

The world is data rich these days. One of our office’s roles is to bring to life this data to better understand, and better explain what is happening. Not everything our office does is directly tied to the revenue forecast, even as it does further our understanding and ability to communicate with policymakers and the public. The key as a researcher is to always peel the onion. There are new layers to uncover and examine. Good analysis should always lead to more questions.

Our office tries to look beyond the headline economic data to see what it means in terms of the daily life of Oregonians. We typically analyze and think through the implications when it comes to different regions of the data, for workers in different industries or occupations, or by their level of educational attainment. In recent years we have taken a few steps — not a lot, but a few — to further explore the changes seen for different racial or ethnic groups in the state. We need to do better. We will do better and are working to incorporate a regular section in our forecast document that adds this additional lens through which to examine the latest socio-economic data.

The key is we know that economic gains do not accrue equally. There are some segments of our society that truly only benefit during tight labor markets and full employment. As the economy strengthened in recent years, we saw better job and income growth in rural Oregon, among those without a high school diploma, those with criminal records or self-reported disabilities, and certainly among our communities of color. Even with these gains, there remains large gaps, or disparities when it comes to socio-economic opportunities and outcomes.

Previously our office looked at household income and employment in addition to poverty rates for different racial and ethnic groups in Oregon. Below is an updated look at one of economists’ favorite metrics: prime-age EPOP. This is the share of prime working-age Oregonians (25-54 years old) who have a job. Even as the differences finally began to narrow some in recent years, it is quite clear there is a sizable, persistent gap over time.

A few notes. First, the way Census asked about and categorized residents by their race and ethnicity has changed over the decades, e.g. you used to be only able to choose one race, now you can choose multiple races or ethnicities.

Second, more historical data exists than is shown here, but Oregon’s black population was extremely small prior to WWII. For example, in the 1940 Census there were about 2,600 black Oregonians, of which 600 were prime working-age men. It is hard to draw many conclusions from the data given such a small population, even as you can draw conclusions about our state’s history.

Third, highlighting and exploring the data is one thing. However explaining the differences can be more difficult, or more uncomfortable to discuss. Now, there are some underlying reasons why these gaps or disparities emerge. Research finds that differences in individuals’ work experience, the occupations they enter into, and their level of educational attainment all drive some of the topline differences in employment, poverty, and income. However these factors never explain all of the differences. The portions unexplained by standard data in the models is generally considered to be due to harder to measure things like broader societal factors or outright discrimination. And these factors also drive some of the other data used to explain the differences to begin with.

Finally, as an example of peeling the onion, and some of the research our office will be incorporating into our forecast documents moving forward, the last couple of graphs dig a little bit into differences in educational attainment among black Oregonians and the statewide figures. As seen below, educational attainment is rising in recent decades for all Oregonians. These gains are relatively consistent across different racial or ethnic groups. However it is clear that black Oregonians earn college degrees at a lower rate than their statewide, mainly white non-Hispanic, peers.

So where does this gap come from? Well, it’s about 50/50 in terms of the share not graduating from high school, and the share that attends college but does not finish a degree. The share of the population with the other levels of educational attainment — a high school diploma, an Associate’s degree or an advanced degree — are all equal.

And of course the reasons this type of analysis and socio-economic outcomes matter is at least twofold. First, it matters in the everyday life of Oregonians in terms of how they live and work. Second, it also matters for future economic and revenue growth for the state. Our office focuses a lot on migration, industrial structure, different forms of capital and productivity, because those all drive future economic gains. Being able to talk through the implications and differences across the state geographically, for different industries and occupations, and for different segments of the population is important. So stay tuned for more consistent research from our office along these lines, where we continue to peel the onion in hopes of better understanding the Oregon economy.

Posted by: Josh Lehner | May 28, 2020

COVID-19 Regional Outlook

Last week our office released the latest economic and revenue forecast for the state. The outlook isn’t pretty as we face years of high unemployment and reduced revenues for public services. Included in the forecast document was a section where we dig into the industry mix and regions of the state. We try to examine the implications for the local outlook and how they vary around the state.

But first, our friends over at the Oregon Employment Department released county level employment data yesterday for April. This is our first hard look at the data, even if they are preliminary estimates that will be revised in the months ahead. As expected, no county went unscathed. Job losses ranged from sizable to tragic. We already knew that job losses so far in the state were the deepest on record, and in the chart below, it is clear that the vast majority of counties are seeing job losses that are larger than experienced during the Great Recession. (Next week we’ll dig further into why our office believes this cycle will be shorter, and the recovery faster than last time, but for now, the initial severity of the recession is certainty worse.)

Given that social distancing impacted consumer services to a larger degree, regional economies in the state that rely more upon these industries have been hit harder to date. Places like the North Coast, Central Oregon and parts of the Gorge all have a larger tourism-dependent economy. These areas of the state have seen the largest job losses (above) and the largest increases in the number of initial claims for unemployment insurance (below). While all sectors and regions of the state are seeing a recession, the severity, at least initially is not uniform.

In recent years our office has spent a lot of time digging into long-run sources of growth, and the main reasons why Oregon’s economy is more volatile than the U.S. We have discussed the state’s industrial structure, how these structures have evolved at the regional level, and how they play into regional volatility. Additionally, we highlighted the importance of both labor force growth, and productivity gains through the local lens. All of this work was designed with an eye toward some unknown future recession and recovery. Well, it’s here now. For those interested in reading more, please refer to the links above. What follows below is based on what we included in our forecast document last week.

In that forecast document our office tried to look forward and see how regional economic structures could impact future growth. We mapped our statewide forecasts by sector to each region. The findings show some areas may be better primed for growth from an industrial structure perspective, while others are more likely to face future headwinds.

One key long-run driver of growth is professional and business services, and office-based work more broadly, which tends to be concentrated in metro areas. As such, the Portland region, the Willamette Valley and Central Oregon are best suited to see stronger gains due to their strengths in these sectors. Among rural counties, Coos, Douglas and Klamath all have concentrations in professional and business services twice that of rural Oregon overall. This should bode well for future growth.

Conversely, regions that may face headwinds due to their industrial structures differ for the reasons why. While the North Coast is hard-hit today due to their exposure to leisure and hospitality, this is not a long-run headwind. Our office fully expects travel, tourism, and going out to eat to essentially recovery fully in the years ahead. Really it is the lack of professional and business services that is weighing on the projected growth in the North Coast in the coming years. The North Coast does not necessarily face longer-run headwinds, rather it lacks industrial tailwinds.

On the other hand, Northeastern Oregon is expected to grow slower due to its reliance on natural resources (ag) and manufacturing, both of which are likely to see slower growth and more permanent damage than other industries due to the recession. (During our presentation to the Legislature, this topic came up. The concentration among natural resources and manufacturing have been historic strengths for the region. For example last cycle, high wheat prices aided the recovery in eastern Oregon. However today commodity prices are low due to the global recession. Additionally, Representative Owens pointed out that while beef prices are high today, that revenue is flowing to the packers and processors and not the ranchers.)

Among urban counties that are expected to see slower gains from an industrial perspective both Linn and Yamhill similarly have a high concentration in goods-producing sectors which are expected to grow slower over the decade ahead. The Rogue Valley (Jackson and Josephine) has a large concentration in essentially all segments of retail that will likely weigh on growth moving forward.

Of course mapping local industrial structures to statewide trends is not perfect, even if it provides one way to gauge potential strengths and weaknesses.

As discussed in-depth in our March 2020 forecast, and included in the links above, long-run growth is determined by labor and capital. What the really means is it is all about the number of workers an economy has and how productive each worker is. As such, key issues to watch are migration trends and changes in the working-age population. Additionally productivity gains can come from many different types of capital, such as financial, natural, physical, human, and/or social.

Looking forward, all of the different types of capital and labor force gains can help drive future economic growth. If a regional economy lacks one source, it is not a deathblow to overall growth. Rather it signals the area must rely on other types or avenues for growth. Finally, even as the mix between, say, natural and human capital plays out strongly in our office’s statewide forecast, keep in mind that one source of growth is not inherently better than the others.

Posted by: Josh Lehner | May 27, 2020

COVID-19 Alternative Scenarios

Last week our office released the latest economic and revenue forecast for the state. The outlook isn’t pretty. The economy faces years of high unemployment which directly translates into reduced revenues for public services. While the baseline forecast is our outlook for the most likely path of the Oregon economy, many other scenarios are possible. Given the uncertainty about the path of the virus and public health, the range of potential outcomes is larger than usual.

I have seen commentary arguing our health assumptions are either too optimistic or too pessimistic. Some of the time when getting criticized in both directions it indicates you did a good job, however some of the time it means you just plain messed up. We shall see.

As always, our office did include a couple alternative scenarios in the forecast last week. These are not designed to be the absolute upper and lower bounds on the potential outcomes. These scenarios are modeled on realistic assumptions of a stronger, faster recovery due to medical treatments becoming available sooner than the baseline, and also the real possibility of a double-dip recession with a longer, slower recovery.

Optimistic Scenario – A Faster Recovery:

The initial severity of the recession is not as deep as under the baseline with the unemployment rate peaking at 18 percent instead of 23 percent. The overall economic recovery is considerably faster primarily due to the accelerated timeline for the development and widespread availability of a vaccine or medical treatment. As the public health situation improves, business and consumer confidence returns to a greater degree, strengthening the economic recovery. Overall the amount of permanent damage done during the shutdown phase is minimal. Personal income is 3-4 percent higher than the baseline, largely driven by stronger employment and wage gains. Even so, the economy does not fully recover until late 2022. What took 3 weeks to break, takes 30 months to put back together. Under the faster recovery scenario, General Fund revenues would be around $500 million higher in both the 2019-21 and 2021-23 biennia.

Pessimistic Scenario – A Double-Dip Recession:

There are two main channels through which a double-dip recession could occur. The first is through a second wave of cases surging this fall resulting in another round of strict social distancing. The resurgence in cases may be due to a seasonal component of the virus, an economy that reopens too soon, or people simply ignoring the ongoing public health guidelines. The second channel is more economic in nature. As the federal assistance programs like the PPP and expanded UI expire over the summer months, it leads to another round of layoffs and closures as firms struggle to stay afloat amidst a weak economy and lower levels of consumer demand.

Regardless of the exact reason, the recession is deeper and more prolonged. The unemployment rate remains above 20 percent for nearly two years and personal income is 7 percent lower than the baseline though the middle of the decade. Overall Oregon’s recovery is slower and the economy does not fully return to health until late 2027. This would put it on the same timeline and trajectory as the aftermath of the Great Recession and the early 1980s recession. Under the double-dip recession scenario, General Fund revenues would be nearly $700 million lower in 2019-21 and nearly $1.4 billion lower in 2021-23.

Posted by: Josh Lehner | May 20, 2020

Oregon Economic and Revenue Forecast, June 2020

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

While the Covid-19 outbreak has injected a great deal of uncertainty into the outlook, the nature of our forecast is unchanged. As always, the June 2020 economic and revenue forecast represents what the Office of Economic Analysis and its advisors believe is the most probable outcome given available information. Although actual economic growth and state revenues may depart significantly from these projections, we aim to build a forecast that is just as likely to end up too high as it is too low.

Forecast errors on both the high and low side create problems for decision makers. In a recessionary environment, a revenue forecast that is too low may lead to cuts in public programs that are unnecessarily deep. If the revenue forecast proves to be too optimistic, the budget will need to be rebalanced when the truth eventually comes out.  Rebalancing becomes increasingly difficult as we approach the end of a budget period, given that much of the allocated resources have already been spent.

In one sense, the sudden stop of economic activity due to the outbreak of Covid-19 has made the revenue outlook clearer.  Economists have a particularly difficult time forecasting turning points in the business cycle.  This time around, it became clear overnight that Oregon is in recession and that the downturn will be severe. Recovery will take years.

As social distancing restrictions continue to lift in the months ahead, underlying economic activity will return. Pent-up demand will transition the economy from recession to recovery as households are able to venture out to a larger degree. This rebound in consumer spending, business sales, and profits will lead to firms hiring back some employees. Economic growth in the second half of this year will be strong. However this initial bounce back will be far from complete.

After this rebound in economic activity, growth will continue but at a relatively slow pace due to the uncertainty surrounding public health. Firms and households are expected to remain somewhat hesitant and only gradually test the waters. Once business and consumer confidence fully return following available medical treatment or the passing of the pandemic, stronger economic growth will resume and the economy will fully recover.

While this recession is extremely severe – the deepest on record in Oregon with data going back to 1939 – it is expected to be shorter in duration than the Great Recession. The economy should return to health by mid-decade. The reasons for the faster recovery include the fact that there were no major macroeconomic issues or imbalances prior to the virus, much of the initial severity of the recession is due to suppressed economic activity, and the federal policy response, however imperfect, has been swifter and more targeted than in recent cycles.

Combined, these factors should help limit the amount of permanent damage done to the economy during the shutdown phase. Should the number of firms that close, or the number of workers displaced remain relatively limited, or rather the amount of time they spend as such be limited, then the overall economic recovery timeline should be shorter than last decade.

How severe will the revenue slowdown be?  During most business cycles, Oregon’s state revenues have proven to be more volatile than those in the typical state. Not only is Oregon’s underlying economy subject to boom-bust swings, but the state also depends on a very volatile mix of revenue instruments, led by personal and corporate income taxes.

During the current recession, income taxes might not fare so poorly in comparison to other revenue instruments. Given the depth and breadth of the current economic downturn, no state revenue system will be spared from pain going forward.  The need for isolation has led to spending declines that far outstrip what is usually seen during recessions, hitting sales tax states disproportionately hard.  States that depend on tourism and energy/mining revenues are also in for a tough year or two.

Oregon will share some of the pain felt by sales tax states since our revenue system has become much more dependent on consumer and business spending over time.  Even before the corporate activity tax was enacted in 2019, a wide range of sales-based taxes had been expanded in recent years.  Taxes on lodging, gasoline, vehicle purchases, video lottery and marijuana sales are all much more substantial than they were during the last recession.

While some taxes will fare better than others, all major revenue sources will face considerable downward pressure given the severity of the recession.  The sudden stop in economic activity has led to the largest downward revision to the quarterly forecast that our office has ever had to make. In the baseline (most likely) scenario, General Fund and other major revenues have been reduced relative to the March forecast by $2.7 billion in the current biennium and $4.4 billion in the 2021-23 budget period.

Fortunately, Oregon is better positioned than ever before to weather a revenue downturn.  Automatic deposits into the Rainy Day Fund and Education Stability Fund have added up over the decade-long economic expansion, and stood at $1.6 billion in April. In addition to dedicated reserve funds, the General Fund had over one billion dollars in projected balances before the recession hit.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | May 19, 2020

Recessions in Oregon (Graph of the Week)

This morning the April employment report for Oregon was released. As expected it was catastrophic. Between the revisions to March and the preliminary data for April, Oregon has lost 267,000 jobs (-14%) in the past two months. The unemployment rate spiked to a record 14.2%. Already this is the deepest recession on record in Oregon, with data going back to 1939.

This depressing version of the Graph of the Week compares employment losses in Oregon for each of the past 5 recessions. Tomorrow our office will release the latest economic and revenue quarterly forecast. I have been making similar types of charts in recent weeks based on our forecast and let me tell you something, the official data just hits differently. This chart is even more striking than I expected. It’s not made up, it’s not a forecast, it’s real.

As you can see, the current recession doesn’t look anything like past cycles. The sudden stop in the economy looks more like what happens to economic activity during a labor strike or in the aftermath of a natural disaster. However, unlike in those situations, our office does not expect activity to quickly return to pre-recession levels like it does when the labor strike is resolved or the rebuilding phase kicks in. Stay tuned tomorrow for more on the outlook.

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